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School district's pension costs could rise

School district's pension costs could rise

Michele Ellson

Tuesday, January 14, 2014 - 00:05

Governor Jerry Brown’s proposed budget offers California’s school districts some good fiscal news in the form of higher per-student funding and payment of billions of dollars of prior-years’ IOUs. But it also offers the possibility of higher pension costs for school and community college districts as soon as 2015.

In the budget proposal released last week, Brown wrote that his administration would begin working with lawmakers, school districts, teachers and the managers of the California State Teachers’ Retirement System on a plan to fully fund pensions that would be adopted in the 2015-16 budget. It posits bigger payments for teachers, districts and the state but says school districts “should anticipate absorbing much of any new funding requirement” and that the state’s contributions to the pension plan “should be evaluated.”

Alameda Unified’s new chief business officer, Robert Clark, declined to comment, saying through the district’s spokeswoman that “it’s too early to know what the final form of that might be when the budget is finalized in June.” Officials with the Alameda Education Association, Alameda’s teacher union, did not respond to an e-mail seeking comment Monday.

The district paid $3.3 million toward teachers’ pensions in 2012-13, a new audit shows; teachers would have paid a little less than that. The state paid an additional $2.8 million on the district’s behalf, the audit showed.

The century-old pension fund – one of the world’s largest – serves 862,000 active and retired California teachers, and it is funded by the state, school and community college districts and teachers.

The median retirement age for members is 62, with retirees earning an average of $3,936 a month, according to CalSTRS’ website (a recent report said the median benefit equals 53 percent of retirees’ final compensation). Teachers enrolled in the system do not receive Social Security.

Pensions for city and county employees, particularly those of police and firefighters, have absorbed a great deal of media attention as municipal leaders scramble to cover the benefits’ growing costs or – in the case of a handful of bankrupt cities – win the right to reduce them. While teachers’ pensions are far less lucrative than those earned by many police and firefighters, their pension fund has fallen victim to the same weak financial markets. (Investment returns have funded 58 percent of benefit costs between 1984 and 2012, the report says, and two-thirds of benefit costs historically, research conducted for lawmakers considering pension reform says.)

Weak returns and the failure of lawmakers to raise payments have eroded the fund’s ability to pay teachers’ promised pensions, a February 2013 report authored by staffers at CalSTRS says. In his budget proposal, Brown said the system’s liabilities outstripped assets by $80.4 billion, and that it's on track to run out of money in 30 years.

The CalSTRS report, which outlines the pension fund’s troubles and offers fixes, put the cost of fully funding its pension obligations at another $4.5 billion a year, an amount Brown’s budget said could “overwhelm other education priorities as well as other policy initiatives.” He’s seeking to phase in cost increases to provide everyone time to budget for them.

Waiting to pay what’s needed could be costlier than paying down the pension debt more quickly, CalSTRS warns in its report, and could also make it tougher and more expensive for school districts to take on additional bond debt, something Alameda schools leaders will likely seek voters’ permission to do this year. But fully funding teachers’ pensions, while perhaps less costly, could be trickier than covering those owed to their municipal counterparts.

The state constitution prohibits the state and municipalities from reducing already-promised pension benefits, and the CalSTRS report says the state can’t raise existing workers’ payment rates without offering additional benefits in return. But newly hired public workers can be charged more for their pensions or receive fewer benefits.

As part of last year’s pension reform package, lawmakers raised the age at which teachers hired in 2013 and beyond could retire with full pensions – 2 percent of pay for each year served – from 60 to 62 and trimmed benefits. The amount of benefits new hires will receive will be on par with what private sector workers get, the report says.

The California Public Employee Retirement System, or CalPERS, can charge participating cities and counties whatever managers believe is needed to cover their pension costs, and that system has slowly been raising rates as one of several initiatives aimed at taming the pension tiger. But school and community college districts’ payment rates are set by lawmakers – who so far have declined to raise them despite CalSTRS’ warnings for nearly a decade that that the pension system’s deficit is growing.

Increasing districts’ payments into the system will generate more cash than equivalent increases for the state or plan members, the CalSTRS report says.

Teachers’ benefit payments have been fixed at 8 percent of their pay since 1972, while school districts’ payments have been fixed at 8.25 percent of teachers’ salaries since 1990. The state’s contribution dropped in the late 1990s but has been rising. In 2011-12, payments into the system were just half the $10.3 billion in pension benefits paid out to retirees (investment earnings covered an additional $932 million).

While raising districts’ contributions could offer the best bang for the buck in terms of closing the pension plan’s funding gap, the CalSTRS report says, the state could ultimately wind up with the bill because California may be obligated to provide additional funding through Proposition 98, which mandates minimum state funding levels for schools.

Switching to Social Security could prove costlier for school districts and teachers, according to the pension program’s independent actuary, while another option – putting money into higher-yield investments – could be too risky, CalSTRS’ report says.

The report offers a range of options, from fully funding the program – at an additional cost of $4.5 billion a year – to slowing its decline at an annual cost of $1.5 billion.

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